The Risk Free Rate of Return is 2%. The Expected % Return on the General Market

Question

The Risk Free Rate of Return is 2%. The Expected % Return on the General Market is 20%, and Firm A's Common Stock tends to be half as volatile as .. the General Market. The stock just paid a Dividend of $ 3.00 Per Share. The Growth Rate in both Year 1 and Year 2 is projected to be 6%. Beyond that point, no annual growth is expected (indefinitely). Given this information, please determine the Stock Price for Firm A's Common Stock.

Now complete Problem # 1 (above) assuming that (it is) the Market Premium (that) is 20%. Under this scenario, what is the Expected % Return on the General Market ?

3. Firm B plans to issue a 3 year Bond, with Interest paid semi-annually. The Coupon Rate is 4%, and the Yield To Maturity is 8%. Based upon this information, at what Price should Firm B expect to sell each Bond ?

Explanation / Answer

          1 Risk Free Rate =Rf=2% Expected return in General Market =Rm=20% Firm A's Beta =0.50 Required return on firm A's stock = Rf+(Rm-Rf)*beta =2% +18%*0.5= 11.00% So required return of Firm A's Equity =11% Stock Price calculation Year 0 Year 1 Year 2 Year 3 Dividend Growth rate 6% 6% 0% Dividend                3.00            3.18               3.37                      3.37 Terminal value of future dividends at yr 3 end                    30.64 Total Future Dividend Income            3.18               3.37                    34.01 PV factor @11%                   1         0.901            0.812                    0.731 PV of future cash flows            2.86               2.74                    24.87 Total of PV of cash flows= $      30.47 Current price of Firm A's stock = $      30.47           2 If the Market premium is 20% Then Expected return on General Market is =Market Premium+Risk free rate=22%           3 Assume bond face value =1000 Years to maturity =3 Semi annual ineterst @2% =$20 Semi Annual YTM =4% Bond price Period Interest +Maturity PV factor @4% PV of cash flows                                                                                              1                 20       0.9615            19.23                                                                                              2                 20       0.9246            18.49                                                                                              3                 20       0.8890            17.78                                                                                              4                 20       0.8548            17.10                                                                                              5                 20       0.8219            16.44                                                                                              6           1,020       0.7903          806.12 Total          895.16 So Current Bond Price =$895.16

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.